China

Executive Summary

China continues to limit foreign investment in key economic sectors by requiring joint ventures with domestic Chinese firms, restricting ownership and shareholder rights of foreign investors, and outright prohibiting investment in some sectors. While China in 2017 made modest market access liberalizations in some sectors, China’s investment environment continues to be more restrictive than its major trading partners, including the United States.

China remains one of the top destinations for global foreign direct investment; however, many sectors of China’s economy remain closed to foreign investment. China historically has used the Catalogue for the Guidance of Foreign Investment in Industries, also known as the “Foreign Investment Catalogue” (FIC), to segment foreign investment into “encouraged”, “restricted”, or “prohibited” categories. In June 2017, China released an updated version of the catalogue that was rebranded as the nationwide “negative list.” China announced openings in a few new industries, including: edible seed oil processing; rice, flour, sugar, and corn processing; biofuels; credit ratings and valuation services; and motorcycle manufacturing. However, important and key industries remained restricted to foreign investment, including financial services, culture, media, telecommunications, vehicles, and transportation equipment.

China has a restrictive foreign investment approval system that shields inefficient and monopolistic Chinese enterprises in many industries – especially state-owned enterprises (SOEs) and other enterprises deemed “national champions” – from competition from private and foreign companies. In addition, foreign investors experience a lack of transparency and a lack of rule of law in China’s regulatory and legal systems, including discriminatory practices, selective enforcement of regulations, and a judiciary subject to interference by the Chinese government and the Chinese Communist Party (CCP). Moreover, China’s industrial policies, like Made in China 2025 (MIC 2025), rely on poor enforcement of intellectual property rights (IPR), forced technology transfers, and a systemic lack of rule of law to inherently discriminate against foreign companies and brands by favoring local products in key high-tech and advanced manufacturing industries.

During the Chinese Communist Party’s (CCP) 19th Party Congress held in October 2017, the CCP leadership underscored Xi Jinping’s primacy by adding “Xi Jinping Thought on Socialism with Chinese Characteristics for the New Era” to the Party Charter. In addition to significant personnel changes, the Party announced large-scale government and Party restructuring plans in early 2018 that further strengthened Xi’s leadership and expanded the role of the Party in all facets of Chinese life: cultural, social, military, and economic. An increasingly assertive CCP has raised concerns among the foreign business community about the ability of future foreign investors to make decisions based on commercial and profit considerations, rather than political dictates from the Party.

While market access reform has been slow, the Chinese government has pledged greater market access and national treatment for foreign investors through the following announcements:

• State Council-issued circulars 5 (January 2017), 39 (August 2017), and 19 (June 2018) announced future foreign investment liberalization in several economic sectors like alternate energy vehicles, banking, securities and insurance, shipping vessels, call centers, and internet/media content businesses. In addition, the circulars said financial incentives would be provided to foreign investors in high-tech and high-value added services industries (or MIC 2025 fields, which will be detailed in a later section of the report), and foreign investors were promised national treatment in China’s legal system, currency flows, IP protections, and overall investment approval system. The most recent circular, number 19, includes provisions to adhere to World Trade Organization (WTO) commitments on joint ventures, explicitly prohibiting local officials from using administrative means to force technology concessions for foreign investment.
• On June 28, the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly announced the release of Special Administrative Measures for Foreign Investment Access (the “nationwide negative list”), which replaced the FIC. The new negative list was reformatted to remove “encouraged” economic sectors and divides restrictions/prohibitions by industry. Some of the liberalizations were previously announced, like financial services and insurance (November 2017) and automobile manufacturing and shipbuilding (April 2018).
• On June 30, NDRC and MOFCOM jointly released the Special Administrative Measures for Foreign Investment Access in the Pilot Free Trade Zones (the Free Trade Zone (FTZ) negative list). The FTZ negative list matches the nationwide negative list with a few exceptions, including: foreign equity caps of 66 percent in the development of new variety crops of corn and wheat (the nationwide cap is 49 percent), removal of joint venture requires on oil and gas exploration, and removal of the prohibition on radioactive mineral smelting and processing (including nuclear fuel production).

While further market access liberalization and fair treatment of foreign investment is welcomed, these announcements lack implementation details and timelines. Even with greater market access, foreign companies will still be subject to inconsistent regulations, growing labor costs, licensing and registration problems, shortages of qualified employees, insufficient intellectual property (IP) protections, and other forms of Chinese protectionism that have contributed to China’s unpredictable and discriminatory business climate.

Table 1 – Key Transparency Indicators of China’s Economy